Market Commentaries & Technical Analysis as at 21 May 2012

State Of Global Economic Cycle (May 2012)

Recession – Recovery – Growth/Expansion – Boom – Burst

Investment Strategy (May 2012): Defensive Neutral Aggressive (Domestic News-Flow From May 2012 onwards and Election Theme Play Amid Uncertainties Ahead – Europe’s Sovereign Debt Crisis, High Oil Prices & Inflationary Pressure, Slow US Growth Momentum While China Grapples With Inflationary Pressures and Slow Growth – Have Given Rise To Fears That Global Economy May Stall.

Sectors/Theme To Focus On (21 May – 25 May 2012): News Flow Related and Political Linked Companies.

Stock Market Leading Performance Indicator (21 May 2012 – 25 May 2012)

4 (0-3-Bearish 4-6-Neutral 7-10-Bullish)

The Risks

1.      The Global Economic Recovery Is Precarious (Vulnerable To The Risk Of More Financial Shocks);

2.      Divergent Growth Path of The Two Regions - A Slowdown In Advanced Economies And The Robust Growth In Emerging Markets – Is Posing A Dilemma For Macroeconomic Policymakers In Asia;

3.      Threats Of Asset Bubbles In Asia (Huge Foreign Capital Inflow Of Liquidity);

4.      Volatile Foreign Exchange Market (Currency War) – Competitive Devaluations & US Dollar/Yen Carry Trade (Destabilizing The Global Financial System & Trading Relationships);

5.      Rising Commodities Prices & Threats Of Commodity Inflation;

6.      Inflation Threat In Emerging Ex-Japan Economies;

7.      Fear Of Double-Dip Recession In The US & Eurozone Economies;

8.      Deflation & Stagflation Threat In Developed Economies;

9.      Fear Of A US Dollar Crisis;

10.  Unwinding Of US Dollar/Yen Carry Trade When US Starts To Normalise Rates (Destabilizing The Global Financial System & The Global Economy);

11.  Global Imbalances, Threat Of Trade & Currency War and Protectionism (Destabilizing The Global Economy);

12.  Contagion Effects Of Eurozone Debts Crisis on Other European Sovereign Debt;

13.  US & Europe Debt Crisis: Further Downgrade Of Credit Rating By Rating Agencies

Black Swan Events Or (Unpredictable) Risks/Surprises

1.      Terrorist Attack -

2.      Oil Supply Disruptions -

3.      A Pandemic Disease -

4.      Geomagnetic Storms -

5.      Major Social And Geopolitical Upheaval

6.      Financial Shock – Eurozone Debt Crisis & Disintegrwtion Of EU Bloc Countries

Market Commentaries

It is external factors now (May 2012) driving the market down. Compared to our regional peers, the FBM KLCI has been holding well until recently. So this drop is actually expected, just that Malaysia has a delayed reaction.

Shares on Bursa Malaysia are likely to dip further amid persistent worries over the global economy. Also expect more local bearishness on the weakening ringgit and commodities.

However ample local liquidity and positive local themes such as the upcoming mega flotation exercises like Felda Global Ventures Bhd and impending project news flow such as RM15 billion North Malay Basin will cushion market decline in the near term.

Greece is set to hold fresh elections on June 17, 2012 after voters rejected austerity measures imposed on it by the EU and the IMF, stirring fears that the country would not stick to the austerity measures earlier agreed upon with the European Central Bank and the IMF. The country has put in place a caretaker government but concerns that it will exit the eurozone. Opinion polls show that anti-bailout parties will perform strongly in a new vote next month.

The 13^th GE is another dampener on the Malaysian stocks and does not think the market has priced in (May 2012) a negative outcome for the ruling coalition BN.

Meanwhile the easing of interest rates trend will continue in 2012. In an environment of slowing global growth and easing inflationary pressure, emerging markets tend to revert their attention to stimulating economic growth. Governments will also need to formulate appropriate policies to generate employment and address income inequality.

In this slightly uncertain environment, expects Malaysia to under perform even as macroeconomic risks diminish. Thus, the Malaysian stock market may lag its regional peers due to perceived heightened political risks from the imminent general election.

The bearish sentiment was also attributed to growing fears over the eurozone breakup, following the new European politics with anti-austerity parties forming post-election governments.

In US equities market, normally a big decline would set up Wall Street for a technical rebound. But that may not be the case this coming week, even after the market posted its worst weekly loss for the year and the S&P fell for six straight sessions.

With the corporate earnings season drawing to an end and recent U.S. economic data raising doubts about the pace of growth, the S&P 500, which is down 7.3 percent so far in till 18 May 2012, could decline further coming week as concerns about the financial health of Europe persist.

Weighing on sentiment is a growing sense among investors that the euro zone debt crisis is nearing new heights, fueled by fears of the potential for a Greek euro exit and the deteriorating health of the Spanish banking system.

Solid corporate earnings and upbeat U.S. economic indicators had fueled the rally in U.S. stocks, offsetting jitters over Europe. But with earnings almost out of the way and data starting to disappoint, investors have shifted their focus back to headlines out of Europe.

Chartist said that the market is extremely oversold now (18 May 2012). Nonetheless, all major indicators of US market remain on sell signals.

The market remains uncertain on concern that Europe's debt crisis was deepening with the European Central Bank's (ECB) decision to halt lending to Greece banks and Spain following Moody's ratings downgrade of 16 Spanish banks.

With Greece set to run out of money as early as June 2012 and no new government in place to negotiate the next aid installment, investors have begun betting that a chaotic Greek default and euro exit will happen sooner rather than later.

Investors remained fearful that a Greek exit from the euro will increase contagion across the continent's financial system.

However Global central banks stand ready to launch a monetary stimulus package if conditions warrant it as well as further intervention by the ECB to calm markets. Any news by the ECB to engage in direct and large-scale quantitative easing to stem the euro crisis is likely to push the market higher.

Already the ECB had warned Greece that it will not receive any more financial aid if ot does not stick to the agreed bailout deal. The ECB had also gave no indication of intervening in the bond market again any time soon, but it said it was still too early to withdraw the bank’s emergency support measures. The ECB has hardly use of its bond purchase programme since Nov 2011.

Europe remains a key risk factor in influencing global trade amid the danger of a deeper-than-expected recession and the spillover effects to the rest of the world.

European politics will also be ontinued to command the spotlight with more elections looming in several countries. This would result in new leadership changes just as the European continent continue to struggle to resolve the sovereign debt crisis.

Germany’s next federal election is expected to take place between Sept 2013 and Oct 2013. A decline in the eurozone’s fortunes would not augur well for US president Barack Obama’s administration either given the impact it could have on the US economy and US banks holding European debt papers. Obama who is also up for re election for a second and final term as president come Nov 2012, could also win points if his administration helps create more jobs.

The question is how the eurozone debt crisis is going to be and how this would impact Asia especially when the US economy still faces an uncertain recovery.

For US the April 2012 employment report came in weaker than expected, showing that only 115,000 jobs were created during the month. Investors are worried about a repeat of the last two years (2010 – 2011) when stocks peaked in the spring.

The unemployment rate ticked down to 8.1%, but that was because prospective workers dropped out of the job hunt, not because meaningful job growth put people back to work. The April 2012 report marks the third consecutive month of declining job growth. The sad reality is that the jobs market is in for a longer recovery, because the cycle of getting more people employed will be pushed out further until the United States can reach the ideal level of structural unemployment.

And it has more to do with the Fed and the notion that things get bad and Bernanke has said the Fed will be more accommodative. The Fed may come in with the June 2012 meeting maybe and offer the market more accommodation.

Meanwhile investors have been pouting over a U.S. economy that is “not hot enough for a sustained recovery and not cold enough to prompt Bernanke to institute a [third round of quantitative easing].

Amidst the climate of economic uncertainty, there is hope that Asia's emerging markets would escape the worst of the fallout from the troubles affecting Europe and perhaps even the choppy US economic recovery despite recent data showing some improvement.

The hope is that domestic demand driven by a combination of private consumption and fiscal pump-priming by governments would help avert a bumpier ride this year or until the pressures emanating from the end-markets in the developed economies ease off.

Technical Analysis

Bursa Malaysias consolidation process changed for the worse the past week, as external uncertainty came back to haunt investors. In the wake of liquidation, the FBM KLCI dived to a low of 1,526.60 during intra-day session last Friday, resulting in all the gains posted year-to-date being wiped out.

Meanwhile, the selloff had dragged the key index below the 100-day simple moving average (SMA), the first time since mid-December 2011, and also brought about the third dead cross on the chart.

Combined with the growing signs of instability among Spanish banks, the political turmoil in Greece, heightening concerns about a slowdown in China and the latest weak US data adding to the list of risk factors and denting sentiment, it really does not bode well for the market in the immediate term.

Going forward, the 200-day SMA of 1,510 is in great danger. A slip below the 1,500-point psychological level would further damage the mid-term landscape of the local bourse.

Lower support floors are anticipated at 1,480 points, followed by the 1,448 to 1,450-point band and the next, at 1,420-1,424 points range.

Technically, most of the indicators are frail, implying range-bound pattern at best. This may also mean that any rebound is likely to be short-lived, at least for now.

Initial resistance is seen at 1,560 points. The next upper hurdle is resting at the 1,591-point level.